The Trust Fund Recovery Penalty: personal liability for unpaid payroll taxes

The TFRP equals 100% of the unpaid trust fund taxes: federal income tax withheld from wages and the employee share of Social Security and Medicare. It does not include the employer's matching share, Form 940 FUTA tax, or the business's penalties and interest. Interest does accrue on the penalty once it's assessed against you.

Excise taxes collected from customers (such as certain transportation or communications taxes) can also be trust fund taxes subject to section 6672, but payroll is by far the most common source.

The IRS must show both:

• Responsibility — the person had the duty and the power to collect, account for and pay the taxes. Signing checks, deciding which creditors get paid, controlling payroll or holding a corporate office are typical evidence. Titles alone aren't decisive; actual authority is. More than one person can be responsible. See who counts as a responsible person.
• Willfulness — the person knew (or recklessly disregarded) that the taxes were unpaid and used available funds to pay other creditors instead. No intent to defraud is required. Paying rent, suppliers or net wages while knowing the IRS wasn't being paid is the classic fact pattern.

A revenue officer investigates under IRM 5.7.4, usually interviewing potentially responsible people with Form 4180 and reviewing bank signature cards and canceled checks. Before assessing, the IRS must send a preliminary notice — Letter 1153 — giving 60 days (75 if addressed outside the U.S.) to protest to IRS Independent Office of Appeals.

If you don't protest, or Appeals sustains it, the penalty is assessed against you personally and collected like any individual tax debt: notices, liens, levies on wages and bank accounts.

Liability is joint and several: the IRS can assess the full trust fund amount against each responsible person. As a matter of policy it collects the total only once, so payments by the business or any assessed person reduce what remains. A person who pays more than their share may have a right of contribution against other responsible people under section 6672(d), which is pursued in court, not through the IRS.

• Protest Letter 1153 if you weren't responsible or didn't act willfully — the strongest point to contest.
• Designate voluntary business payments to the trust fund portion while the business is still paying, which directly reduces the penalty — see designated payments.
• Pay a divisible portion and claim a refund to reach court — see paying and contesting the TFRP.
• Once assessed, standard individual options apply: payment plans, an Offer in Compromise or hardship status. First Time Abate does not apply to the TFRP itself.